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Demystifying M&A

How to react to an inbound approach from a buyer

5th December 2018

By Jason Purcell

It is an exciting moment for a founder or CEO when a potential buyer approaches you and expresses an interest in acquisition. Especially if it is a tech giant from Silicon Valley – the ultimate aspiration for many tech entrepreneurs and their backers. Nevertheless how you react and the messages you send, either explicitly or implicitly, can have a big impact on the outcome. Achieving a strategic valuation by selling to the best possible buyer on the best possible terms is challenging, so we thought we’d share a few tips on how to react to an inbound approach, gained through our own experiences of selling European companies to the likes of Microsoft, Facebook and Apple.

Qualifying the approach

We hear a lot from companies that they “have had an approach” from a buyer and it’s just a matter of sealing the deal. Unfortunately, often, if not most of the time, these “approaches” turn out to be speculative tyre kicking and go nowhere. Without proper qualification of the buyer, you could spend a lot of time and reveal a lot of information before realising that there is no deal.

It’s not easy to spot the true motivation of a potential buyer, but one tip is to determine whether you have people from both the Business Unit and Corporate Development teams of your buyer involved. Business unit staff will own the business case, but they cannot usually execute a deal without the Corporate Development team. Similarly, if you hear from someone in Corporate Development, they may be doing a market scan on behalf of a business unit, but they do not own the deal internally and they are not the ultimate decision makers. In most cases you need people from both departments actively engaged to be sure that they are ready to kick off a genuine acquisition process.

Assuming there is genuine buyer interest, and you have progressed discussions to the stage where you expect initial offers, there are some key things to bear in mind in getting the best possible deal.

Negotiating the deal

Always have an alternative

The best way to ensure that you can deliver the best deal is by having a good alternative, which is usually having more than one potential buyer at the table. Even if you are in discussions with your dream Silicon Valley buyer and you strongly prefer to do a deal with them, we’d highly recommend having an alternative (which of course may be that you decide not to do a transaction) in order to optimise negotiations and timing. For more information on why, read our guide to the auction process.

For the maximum leverage, your alternatives should be as credible as possible, and ideally something that would worry your potential buyer. For example, they will be a lot more worried if they think that their close competitors will buy you and hence gain competitive advantage than if they think they are competing in the deal against someone they don’t care about. Obviously, you should never tell them who else you are talking to, but how you act and the messages you deliver is as important as what you say.

Messaging and communicating

The messages you send throughout the course of the process are really important. Buyers will often try to play stakeholders off against each other to get an inside track and a better deal by isolating them and getting them focused on one issue. All communications from all parties must be consistent and disciplined. We spend a lot of time with our clients preparing the messaging, coaching the management, and shielding the stakeholders so that they can maintain their “higher authority” in decision making. This allows us to exert greater pressure in negotiations.

Staying focused on the important issues

It would be easy to be swamped by the deal – with a tech giant as a buyer, their sheer size and the number of people they will deploy in getting the deal over the line is often more than the entire number of employees in your company. You’ll be inundated by information requests, and sidetracked by issues that arise from the lawyers. It can get extremely tense and emotional. Having us as an experienced adviser acting on your behalf, fending off distractions, keeping the deal on track and dealing with the inevitable ups and downs helps to ensure that the deal closes on the agreed terms and within the agreed timeframe.

If you’ve had an approach and want some guidance on how to respond and get the best deal for your business, give us a call to talk through your options.